3 Budding Dividend Growers for Retirement

by Marc Bastow | July 22, 2013 12:14 pm

[1]There’s a reason we highlight Dependable Dividend Stocks[2] — it’s no small thing to put together decades of dividend growth, and it usually helps identify rock-solid companies that can slug it out through thick and thin.

But it’s easy to put too much focus on these well-known dividend stocks — companies like Coca-Cola (KO[3]), which has been upping its payout for almost half a century — and miss other businesses that are starting to build dividend legacies of their own.

Right now, we’re looking at companies that have improved their quarterly payouts by at least 40% in the past three years. Also, while these are very much long-term buys, there’s no reason to jump in at too expensive a valuation, so we’re looking for ones that at least are coming in around the S&P 500 average of 19 — if not lower.

The last thing to note is that none of these companies have particularly screaming yields, but don’t let that concern you. All three stocks have enjoyed good to great returns in the past few years, so dividends are actually just trying to keep up with prices — and should that continue, you’ll be riding a one-two punch of an improving yield on cost as well as stock appreciation.

Now, here’s a look at those three stocks:

Crane

[4]% Dividend Increase Since 2010: 40%Dividend Yield: 1.8%P/E: 18

Crane (CR[5]) is one of those gems that manufactures products nobody thinks about until they need them (hoses), as well as specialized parts for machines we use every day (bill validation systems in vending machines).

Crane’s last three years of revenue growth have been steady if not stellar, and only an “unusual expense” charge of $271 million related to a liability at its Goodyear, Ariz., Superfund Site in 2011 kept CR from similar solid bottom-line growth.

Crane has about $390 million in cash, and it produced roughly $200 million in free cash flow in 2012 while paying out $62 million in dividends.

CR’s yield has been held back by a 71% run in the past 52 weeks, but dividend growth of 40% since 2010 should encourage income hunters, as should four decades of uninterrupted quarterly payouts.

Travelers

Travelers (TRV[7]) is one of the largest writers of commercial U.S. casualty insurance and personal insurance.

2012 was a challenging year, primarily because of the inordinate number of claims and payouts resulting from Superstorm Sandy, with (pre-tax) catastrophic losses at just under $2 billion. And yet, TRV managed to grow revenues for a fourth consecutive year and increase its net income a whopping 73% to $2.473 billion in fiscal 2012 compared to $1.426 billion in 2011, primarily because of higher underwriting margins.

The company’s focus on those margins also produced a 12% increase in net income for the first quarter of 2013, even with a marginal decline in revenues.

And what income investors will really like: TRV boasted $530 million in operating cash flow for Q1 that would’ve covered three quarters of dividends at its current 50-cent payout — a dividend that TRV started paying in 2007 and that has improved more than 50% in the past three years.

Nobody can predict the problems year-to-year weather events might inflict on property and casualty insurers, but make no mistake — in the long haul, the best insurance companies make sure they get theirs. Considering how Travelers weathered Sandy, investors should feel pretty good about TRV’s future.

Parker Hannifin

[8]% Dividend Increase Since 2010: 80%Dividend Yield: 1.8%P/E: 16

Motion and control technology. Fluid power systems. Electrochemical controls.

If these products make you woozy with confusion, don’t worry — all you need to know is that Parker Hannifin (PH[9]), founded in 1918, sells enough of them to haul in $13 billion in annual revenues. Parker’s operations span 48 countries and features 40 different product lines, including Airtek filters, Gold Ring valves and Pioneer adapters.

The company has managed to grow the top and bottom lines for three consecutive years, and its solid balance sheet includes $1.38 billion in cash and $390 million in free cash flow in the last reported quarter — more than enough to support its regular $64 million dividend payout.

PH’s dividend increase streak might be light at eight years, but it has been making uninterrupted quarterly payouts for 26 years. The yield is a bit paltry, but that’s been affected in part by 65% gains since its late 2011 lows. Nonetheless, Parker has been trying to keep up, improving its payout by about 80% since 2010.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he does not hold a position in any of the aforementioned securities.